Will Sprint go Bankrupt According to the Altman Z Score?
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The Altman Z score was formulated by a professor Altman in 1968 to predict bankruptcy. You can also read a somewhat current paper by professor Altman which includes his work on the Z score. To sum it up quickly, here is what wikipedia has to say about it.
The Z-score formula may be used to predict the probability that a firm will go into bankruptcy within two years.
Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company.
The main problem with the Altman Z formula is that the formula is not suited for all industries. Industries that operate with high leverage, such as radio and utilities will produce a low Z score which equates to a high risk of bankruptcy.
For example, Waste Management (NYSE: WM) has an Altman Z score of 1.18 for its Most Recent Quarter which is a red flag, but the company itself generates plenty of free cash flow and will not go bankrupt anytime soon. So that is the limitation of the Altman Z score. Keeping that in mind, let's first move onto what the Altman Z score is made up of.
Working with the Altman Z Score
The Z score consists of 5 variables:
- X1 = Working Capital/Total Assets
- X2 = Retained Earnings/Total Assets
- X3 = EBITDA/Total Assets
- X4 = Market Value of Equity/Total Liabilities
- X5 = Net Sales/Total Assets
Original Altman Z Score for Public Companies
The original model to calculate the Z score for public manufacturing companies is as follows.
Z = 1.2*X1 + 1.4*X2 + 3.3*X3 + 0.6*X4 + 1.0*X5
When Z is 3.0 or more, the firm is most likely safe based on the financial data. However, be careful to double check as fraud, economic downturns and other factors could cause unexpected reversals.
When Z is 2.7 to 3.0, the company is probably safe from bankruptcy, but this is in the grey area and caution should be taken.
When Z is 1.8 to 2.7, the company is likely to be bankrupt within 2 years. This is the lower portion of the grey area and a dramatic turnaround of the company is needed.
When Z is below 1.8, the company is highly likely to be bankrupt. If a company is generating lower than 1.8, serious studies must be performed to ensure the company can survive.
Will Sprint Go Bankrupt?
Based on the above formula and using the numbers from Sprint's (NYSE: S) most recent 2nd quarter filing, Sprint has an Altman Z score of -0.76.
This number is well below even the lowest criteria number.
Granted, the Altman Z score is not 100% accurate, and it may also be because telco companies have a high debt load that the score is so low, but Professor Altman sure does paint a gloomy picture for Sprint.
The negative number is suggesting that Sprint has some serious issues with its income statement and balance sheet.
Digging a little further into Sprint's numbers, there are warning signs of deterioration.
- The TTM for ROE is at an all time low of -40% compared to -25% in fiscal 2011
- ROA is also at a historical low at -8%
- ROIC is only a little "better" -3%
So far, it seems like everything Sprint is doing is losing money. How much value
The current ratio gives you a value of 1.6 but if you look at the number side by side with a Total Debt/ Equity ratio of 2.3 it does not inspire much confidence.
That's where Sprint is at the moment, but with their network expansion plans, capital expenditure for growth, its aggressive bet on the iPhone and attractive plans for subscribers, Sprint has managed to push the stock price by more than 100%.
The future is still murky and a lot can go wrong or right, but so far Professor Altman is still bearish on Sprint from the accounting side of things.
Free Altman Z Spreadsheet and Screen to Try Out On Your Own
If this is a method that interests you, rather than having to do all the manual work, try it with this free Altman Z spreadsheet that will calculate it automatically for you as well as an Altman Z screen identifying companies with strong Altman Z scores.
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